Mercantilism is a trade theory holing that a country’s wealth is measured by its holdings of “treasure” which usually means its gold. The mercantilists proposed theory of mercantilism. They were a group of economists who preceded Adam Smith. The foundations of economic thought between 1500 and 1800 were based on mercantilism. Mercantilists believed that the world had a finite store of wealth; therefore, when one country got more, other countries had less. Mercantilists restricted imports and encouraged or subsidized exports as a conscious policy to make their citizens better off. Mercantilists judged the success of trade by the size of the trade balance.

Mercantilism was a sixteenth-century economic philosophy that maintained that a country’s wealth was measured by its holdings of gold and silver. This required that the countries to maximize exports and minimize imports. The logic was transparent to sixteenth-century policy makers that if foreigners bought more goods from us than we bought from them, then the foreigners had to pay us the difference in gold and silver, enabling us to amass more treasure. With that treasure we could expand the nation’s global influence.

Mercantilists pressed for favorable balance of trade (BOT) or balance of payments (BOP) as against the unfavorable one. In a way it is good because your currency appreciates with mounting surplus on the Fore front, and the country can attract more foreign capital infusion further strengthening the country’s economy, infrastructure, etc. Now China and Japan with enormous favorable BOT and BOP get all the benefits envisaged by mercantilists.

According To Adam Smith-

-Mercantilism is an economic theory popular in the 1500s and was the biggest reason for Europe’s desire to colonize new lands - the theory states that there is a certain amount of wealth in the world and it is in a nations best interest to accumulate it - through wealth, a nation can achieve power

- a country achieves wealth through producing and exporting more good then they import - this theory was invented to serve the interest of the empire, not the colony

Evaluation of Mercantilism Theory:

Mercantilist writers have been lauded and criticized in the literature on foreign trade at least since Hume’s Political Discourses in 1752. Mercantilists have been criticized for everything from their views regarding the gains from trade to their self-promotion of the merchant’s role in society as being important. Mercantilist writers assumed that the economy will generally operate at a pace that leaves resources –land and labor – idle, but in reality the economy naturally tends to full employment. This is a “flaw” in the logical foundation of mercantilist thought. The regime of WTO has moved the world away from mercantilism by pressing for free trade with reduced protectionism.

Theory of Neo-Mercantilism:

Mercantilism is still in vogue. Mercantilist policies are politically attractive to some firms and their workers, as mercantilism benefits certain members of society. Modern supporters of these policies are known as neo-mercantilists, or protectionists. The neo-mercantilists want higher production through full employment and that every industry produces an exportable surplus leading to favorable BOT. Consciously or otherwise, every country is concerned about increasing export earnings. The merits of surging Fore surplus built through exports speaks well of a country’s capability to cater to world’s needs qualitatively, quantitatively and in varied product/service ranges. Every country does what is possible to meet this end. But the modern trade emphasis is ‘Export more and Import more’.

Finally:

The main economic system used during the sixteenth to eighteenth centuries. The main goal was to increase a nation's wealth by imposing government...

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...﻿Theories of Trade
7 – TradeTheories
Mercantilism Theory
1. Mercantilism is the oldest InternationalTradeTheory that found during 1630 by
2. William Petty, Thomas Mun and Antoine de Montchrétien.
3. The base of this theory was the “commercial revolution”, the transition from local economies to national economies, from feudalism to capitalism, from a rudimentary trade to a larger internationaltrade.
4. Mercantilism is an economic theory that holds a country’s treasure primarily in the form of gold constituted its wealth.
5. This theory says that countries should export more than they import, so they can receive the value of trade surplus in the form of gold fro the countries that experience Trade Deficit.
6. It superseded the medieval feudal organization in Western Europe, especially in Holland, France, United Kingdom, Belgium, Portugal and Spain. The monarch controlled everything. Their policy was to export in the countries that they controlled and not to import (to have a positive Balance of Trade).
7. Export – inflow of gold and silver
Import – outflow of gold and silver
Definition
Mercantilism is an economic theory holds that the prosperity of a nation is dependent upon its supply of capital, and that...

...﻿CHAPTER 5: INTERNATIONALTRADETHEORY
QUICKNOTES IN GLOBAL INTERNATIONALTRADE
Condensed by: Group 2
7 THEORIES OF INTERNATIONALTRADE:
1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life-Cycle Theory
6. New TradeTheory
7. TheTheory of National Competitive Advantage
1. Mercantilism
-emerged in England in the mid-16th century. The main tenet of mercantilism was that it was in a country’s best interests more than it imported. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. To achieve this, imports were limited by tariffs and quotas, while exports were subsidized. The flaw with mercantilism was that it viewed trade as a zero-sum game.
Zero-sum Game- is one in which a gain by one country results in a loss by another.
2. Absolute Advantage
-In his 1776 landmark book The Wealth of Nations, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game. He argued that countries differ in their ability to produce goods efficiently. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage...

...InternationalTradeTheories
Mercantilism Mercantilism was a sixteenth-century economic philosophy that maintained that a country's wealth was measured by its holdings of gold and silver (Mahoney, Trigg, Griffin, & Pustay, 1998). This recquired the countries to maximise the difference between its exports and imports by promoting exports and discouraging imports. The logic was transparent to sixteenth-century policy makers-if foreigners buy more goods from you than you buy from them, then the foreigners have to pay you the difference in gold and silver, enabling you to amass more treasure. With the treasure acquired the realm could build greater armies and navies and hence expand the nation’s global influence. Politically, mercantilism was popular with many manufactures and their workers. Export-oriented manufacturers favoured mercantilist trade policies, such as those giving subsidies or tax rebates, which stimulated their sales to foreigners. Domestic manufacturers threatened by foreign imports endorsed mercantilist trade policies, such as those imposing tariffs or quotas, which protected them from foreign competition (Mahoney, Trigg, Griffin, & Pustay, 1998). Most members of society are hurt by such policies. Government subsidies of exports for selected industries are paid for by taxpayers. Mercantilist terminology is still used today, an example when television commentators and newspaper headlines...

...﻿
Theories in InternationalTrade
Mercantilism
The main economic system used during the sixteenth to eighteenth centuries. The main goal was to increase a nation's wealth by imposing government regulation concerning all of the nation's commercial interests. It was believed that national strength could be maximized by limiting imports via tariffs and maximizing exports.
Adam Smith's Absolute AdvantageTheory
Adam Smith's Absolute Advantage Theory says that one country would have an absolute advantage over the other if it can produce same amount of goods with fewer resources. This is then the ability of a company or a country to produce more goods than its competitors using same or less resources. The principle was described by Adam Smith in the context of internationaltrade.
David Ricardo theory of Comparative Advantage
Popularized by David Ricardo, comparative advantage argues that free trade works even if one partner in a deal holds absolute advantage in all areas of production - that is, one partner makes products cheaper, better and faster than its trading partner.
The primary fear for nations entering free trade is that they will be out-produced by a country with an absolute advantage in several areas, which would lead to imports, but no exports. Comparative advantage stipulates that...

...Ricardian trade model and specific factors model
As the rapid development of internationaltrade, we are now studying special models to analyze economic situations. There are two models I want to compare and contrast in the world trade: the Ricardian trade model and the Specific factors model.
In the Ricardian trade model, there is only one factor of production that is labor. Labor productivities between countries were assumed to be different due to differences in technology and it is constant in each country. Labor was also assumed to be fully mobile across sectors but immobile between countries. Home and Foreign are two countries we considered in the model who produce only two goods. It is assumed that perfect competition happens in the world trade so that price equals to marginal cost.
we note that aj is the unit labor requirement which indicates the constant number of hours of labor required to produce one unit of good j. Then 1/aj is labor productivity. The production possibility frontier (PPF) is introduced to show the maximum amount of a good that can be produces for a fixed amount of resources. In autarky, the relative price of trade is determined by the technological references.
The frontier of the production possibilities (FPP) of home country:
[pic]
From the diagram above, all possible combinations of productions are along this PPF...

...Introduction
Internationaltradetheory provides explanations of the benefit for country to engage in internationaltrade, even for products it can produce for itself. As time goes by, there are mainly 7 types of theory, namely, mercantilism, absolute advantage, comparative advantage, Heckscher-ohlin theory, product life-cycle theory, new tradetheory, Porter’s diamond national competitive advantage theory. Although some of the theories hold different view of patterns of internationaltrade and vary in attitude for free trade, they all proposed that internationaltrade is beneficial. Internationaltrade, referring to the exchange of capital, goods, and services across international borders or territories, allows a country to specialized in the manufacture and export of products that it can produce efficiently while importing products that can be produced more efficiently in other countries. This essay will….
Main theory
Mercantilism, the first theory of internationaltrade, asserts that trade is a zero-sum game and thus countries benefit from trade by maintaining a trade surplus—export more and...

...﻿Overview tradetheoriesInternational Economics
Classical tradetheories
Explanation
Absolute advantage theory (Smith)
* When one nation is more efficient than another in the production of one commodity but is less efficient than the other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage (most efficient commodity) and exchanging part of its output with the other nation for the commodity of its absolute disadvantage (least efficient commodity).
Comparative advantage theory (Ricardo)
* According to the law of comparative advantage, even if one nation is less efficient than (has an absolute disadvantage with respect to) the other nation in the production of both commodity one and two, there is still a basis for mutually beneficial trade. The first nation should specialize in the production of and export the commodity in which its absolute disadvantage is the smallest (=commodity of its comparative advantage) and import the commodity in which its absolute disadvantage is greater (=comparative disadvantage).
Shortcomings Classical tradetheories
Explanation
1) Labour theory of value
Ricardian theory of internationaltrade assumes the application of labour theory...